July 2015

TRIBAL PAYDAY LOANS

01/28/2015

Getting a payday loan used to be quite simple. If you had a job (no matter how long you had been at the job) you could qualify for a good sized payday loan, probably at least $500 and maybe up to $1,000. Before the financial crisis getting approved for just about all loan products was far more simple than it is today.

As we being 2015 the credit crunch is still in full strength for the majority of American consumers. Most Americans (that is the majority, at least 51% of the population) would not qualify for a home mortgage, and a very large slice (somewhat smaller than 51%) would not qualify for a car loan. A huge percentage, probably somewhere around 85% or maybe even higher would not qualify for an unsecured bank loan. The personal loan (also sometimes referred to as the signature loan) has all but vanished from the realm of U.S. banking. And for people on the lower half of the economic tier those types of unsecured products have disappeared completely.

They disappeared from banks completely, but not from all lending sources. That's a big part of the how and why we know find Native American lending companies dominating the unsecured small loan market on the internet. It's not a coincidence that these tribal lenders are (mostly) free from the regulations and restrictions on interest rates that banks must adhere to.

When we look at loans from tribes (meaning loans that are written and issued from Indian reservations, lands that are designated as sovereign from the United States) we are finding them in the right place at the right time. The fact that tribes do not have to conform to state laws regarding interest rate caps means that they can make however much money they see fit when it comes to charging finance fees.

While it would be unthinkable to charge over 200% APR for a loan through a bank or for a car dealer to charge anywhere near that amount, we have hundreds of tribal lenders that are willing to (and able, and they do) charge over 700% APR for their loans. This is where unregulated economics takes you, the consumer. The financial arena needs to have unsecured lending, that's been essentially a known fact since post World War 2, but where we have arrived in society today is that we have plenty of unsecured lenders but none that charge what would be considered a decent, or reasonable rate.

Many tribal lenders will charge anywhere from 25% to 35% interest for every 14 calendar days.

Now before we move on, look up at those two comparisons. Let's do that one more time. Traditional lenders are charging 4% to 35% annually. The average tribal lender is charging 30% interest every 14 days. We are comparing roughly a 20% APR to a 700% APR. This is night and day.

With these numbers in place we can start to understand how Native American lenders can still be issuing unsecured debt (and thriving in that business, by the way) while the rest of the financial (and retail) markets have turned away from this activity. By charging such huge rates the tribal lenders have essentially overcome the very real risks associated with providing loans with no collateral (no security deposit, no specially funded account) and these companies can deal with the fact that a certain percentage of customers will never repay the debt.

The loans that do get repaid more than make up for the losses from the delinquent or accounts that fall into the write-off category. And even with the loans that get charged off the tribal lender will make a few cents on the dollar from the outside collection agency.

Given all of this troubling, and to many customers, financially detrimental information the question is why do so many new customers keep coming back to Native American lenders? And better yet, why do customers who have experienced these high rates return to get more of these loans? The answer is pretty simple, it's because there is no alternative to the lending facilities being operated by the tribes. Yes, there are payday loan stores and other short-term lenders but they are more selective with who can borrow their cash. Plus, there are greater intrusions (or as many people would say, proper regulations) being thrust upon the state licensed lenders.

For instance many states now only allow one short-term loan to be outstanding to a single customer at a time. If that customer does not repay or is late repaying, or if the loan has yet to be paid off, then that customer will be blocked by the state (through a third party agency) from borrowing any more funds.

The customer can still apply for a loan and be approved (and yes this does happen, particularly in Illinois) and think that the funds are on the way, only to find out the next day the funds were literally blocked by the state. These regulations are designed to help consumers from destroying their own finances but they often cause a lot of financial damage, like the loss of checking accounts by customers who are overstretched with charges and already facing financial collapse.

Tribal loans matter because for half of this nation they are the only source for a loan, at all. Until the credit markets find their way back to some sense of normalcy and average people can have some level of access to credit, the demand for Native American loans will not abate and in fact will most likely continue to grow.